Stock Broker Fraud Blog

In a note to investors, Wachovia Securities Analyst Doug Sipkin commented on the state of the leading Wall Street securities firms in light of the worsening global credit crisis.

Sipkin blamed the “The failure of Bear Stearns” on a “management issue” rather than a “market issue.” JP Morgan Chase & Co. recently purchased Bear Stearns, the fifth largest securities company, for $236 million—that’s $2/share—a 90% market drop in just two days. The securities firm ran out of money after clients took away funds.

Sipkin, however, reassured investors that the action taken by the Federal Reserve to reduce emergency lending rates will keep the other four big securities firms in business.

The Wachovia analyst says that worries about Lehman Brothers are misguided and that the bank has sufficient liquidity to keep business running. Sipkin cited Lehman’s “superior management” and “superior business.”

Lehman and Goldman Sachs are expected to garner new business from the Bear sale. Sipkin said Goldman will likely benefit from “migrating prime brokerage balances,” while Lehman would likely pick up “material market share" in mortgages.

Morgan Stanley, said Sipkin, seems to be weathering the crisis because it has its asset management and brokerage businesses.

Sipkin pointed to Merrill Lynch as appearing to be the weakest of the top Wall Street firms—but said that it would also likely stay afloat, considering that its balance sheet had the highest leverage.

Related Web Resources:

Ahead of the Bell: Investment Banks, Chron.com/AP, March 18, 2008

US stock market drops as Bear Stearns sold for $2/share, Reuters, March 17, 2008

JP Morgan Shares to Acquire Bear Stearns, Bear Stearns

If you have been the victim of investor fraud, you are entitled to the recovery of your lost investment. Contact Shepherd Smith and Edwards today to schedule your free consultation with one of our stockbroker fraud lawyers.

This week, Goldman Sachs told a number of investors that they could not withdraw money from their auction-rate securities investments. This move by Goldman came as a shock to investors—but the firm was not alone. Merrill Lynch, Lehman Brothers, and other banks have also found themselves notifying their investors that the market for these types of securities are frozen—along with their money. Just this week, there were nearly 1,000 failed auctions. The banks are now refusing to support the auctions and many investors are not sure when they’ll recover their investments.

Usually, auction-rate securities are considered safe alternatives to cash—and banks frequently recommend these bonds, considered long-term securities—to rich individuals and corporations. Banks regularly hold auctions to establish the interest rates and give holders an opportunity to sell their securities.

Auction-Rate Securities
The auction-rate market is valued at $330 billion. Tax-exempt institutions, including municipalities, student loan companies, closed-end mutual funds are among those who participate in the market.

Just because there is a failed auction does not mean the securities have defaulted. Issuers are allowed to pay interest at the “fail rate,” which is the higher rate.

Investors are not happy with the frozen state of the auction-rate securities market. Brokerage firms are not legally bound to make a market in auction securities or provide clients with a price.

One wealthy investors said he bought the securities after Goldman likened them to the equivalent of cash. Another investor, a New Jersey family, is suing Lehman Brothers because the value of its cash in auction-rate securities is decreasing. Drug manufacturer Bristol-Myers Squibb has already had to write-off the $275 million it invested in auction--rate securities because of the failed auctions.

These investments were often compared to money market funds. Many investors were told there was little or no risk in these investments, even after reports surfaced which indicated danger of owning such securities. Some financial firms reportedly encouraged individual investors to purchase these securities as they worked to reduce their own exposure and that of their large institutional clients.

Shepherd, Smith, & Edwards is a stockbroker fraud law firm that represents investors that wish to recover money they have lost because of the misconduct or negligence of an investment adviser, broker, or firm. One of our investment fraud lawyers would be happy to speak with you during a free consultation.

Related Web Resources:

New Trouble in Auction-Rate Securities, New York Times, February 15, 2008

Muni Regulators Seek Disclosure on Auction-Rate Bonds, Bloomberg.com, February 15, 2008

Goldman Sachs & Co. says it will settle a class action suit filed by the University of California (UC) over the purchase of Enron Corp. securities for $11.5 million. The University of California Board of Regents has approved the terms of the settlement.

Goldman allegedly marketed Enron 7% exchangeable notes via a registration statement that was false and misleading—this is a violation of the 1933 Securities Act.

UC says that it has so far received over $7.4 billion in settlements for Enron investors, including:

JP Morgan Chase: $2.2 billion
Canadian Imperial Bank of Commerce: $2.4 billion
Citigroup: $2 billion
Bank of America: $69 million
Lehman Brothers: $222.5 million
Andersen Worldwide: $33 million
Kirkland & Ellis LLP: $10.2 million
Arthur Anderson LLP: $72.5 million
Enron’s outside directors: $168 million

Barclays Bank, Merrill Lynch, Credit Suisse First Boston, Royal Bank of Scotland, Royal Bank of Canada, Toronto-Dominion Bank, and several ex-Enron officials have also been named as defendants by UC. The class involves some 1.5 million Enron stock and bond buyers whose losses due to the alleged fraud run over $40 billion.

Last month, U.S. Supreme Court refused to review the decision by an appeals court that blocks securities fraud claims made by Enron shareholders to recover damages from three large investment banks that allegedly helped Enron cover up its losses.

As an investor you have a right to get your money back if you have been the victim of investor fraud. Contact Shepherd Smith and Edwards today and ask for your free consultation with one of our experienced stockbroker fraud lawyers.

Related Web Resources:

Goldman Sachs settles with UC, Daily Bruin, February 9, 2008

Enron Securities Fraud Lawsuit, University of California

Goldman Sachs

The Rise and Fall of Enron, New York Times

What was the role of the Securities and Exchange Commission in the collapse of the subprime mortgage bubble? Although mortgage brokers, investment banks, and ratings agencies are frequently held responsible for the demise, little is said about the roles of the Financial Industry Regulatory Industry (FINRA) and the SEC—both watchdog agencies that are responsible for monitoring complex credit derivatives and their suitability requirements for investors.

Yet where was the SEC when it was time to oversee investment banks and determine whether they had sufficient capital for their balance sheets, trading positions, and the appropriate risk management systems so that major losses could be avoided?

One notable problem is that there is not enough clear data available about the credit derivatives market. Structured finance products, including collateralized debt obligations (CDOs) are traded over-the-counter in the United States. This means that price information for these products is not easily accessible.

It wasn’t until 2007 that the SEC, the Commodities Futures Trading Commission (CFTC), and other members of the President’s Working Group recommended that stricter oversight of the over-the-counter market be implemented.

While regulators are now examining the way banks structured, priced, and sold mortgage-laden securities, some industry insiders feel that these steps were taken too late. Should the SEC have noticed the warning signs?

In 2006, Merrill Lynch senior executive Jeff Kronthal was fired when he responded reluctantly to former Chief Executive Stanley O’Neal’s mandate that firms be more aggressive about taking risks with mortgage securities. Morgan Stanley’s new Chief Executive John Thain rehired Kronthal last December.

In 2005, Bear Stearns reported in its 2005 financial disclosure that it was threatened by a possible civil enforcement action related to pricing, analysis, and valuation of $63 billion in CDOs. Bear Stearns also reported that then-New York Attorney General Eliot Spitzer had contacted the firm about $16 billion in CDOs it had sold to an undisclosed client.

Former SEC attorney Gary Aguirre says that while aggressively pursuing Pequote Capital and its alleged involvement in an insider trading case in 2005, he was fired when he tried to interview Morgan Stanley Chief Executive John Mack. Aguirre claims that the SEC is too closely associated with the industry it regulates.

Earlier this month, securities regulators in Massachusetts filed a civil fraud lawsuit against Merrill Lynch over $14 million in CDOs that the firm sold to the town of Springfield. Regulators say they were unsuitable for and sold without the town’s permission. Merrill has admitted to the town’s lack of consent and paid its investment back in full—although it now has little value.

The Federal Bureau of Investigation says it is conducting criminal investigations into 14 firms regarding their involvement in mortgage securitization activities.

Morgan Stanley, Merrill Lynch, Bear Stearns, and Goldman Sachs all admit that different regulators have asked them about their handling of subprime mortgage securities.

If you are an investor who has lost money because of the misconduct or negligence of someone in the securities industry, please contact Shepherd Smith and Edwards today. Your first consultation with one of our stockbroker fraud lawyers is free.

Related Web Resources:

SEC

Collateralized Debt Obligation (CDO), Investopedia

Subprime Mortgage, Investopedia

Eugene M. Plotkin, a former Goldman Sachs associate, will serve 57 months in prison for his involvement in insider trading. Plotkin pleaded guilty to conspiracy and eight counts of insider trading for his role in a number of insider trading scams that generated over $6 million in illegal gains.

The former fixed-income research associate to will have to forfeit $6.7 million and pay a $10,000 fine. The forfeiture will come from money that the government has already frozen.

Plotkin, along with ex-Goldman analyst David Pajcin, was one of the key players accused of illegally trading stocks after consulting prepublished copies of BusinessWeek’s “Inside Wall Street” column. The scam also involved the use of information leaked by Jason Smith, a grand juror in the Bristol-Myers Squib Co. case and information provided by Stanislav Shpigelman, a former Merrill Lynch investment-banking analyst.

The men used info about Merrill Lynch’s upcoming acquisitions and mergers, including the Adidas acquisition of Reebok and the Proctor & Gamble acquisition of Gillette Co. to make illegal trades.

Plotkin and Pajcin also recruited two Wisconsin printing plant workers and had them steal the advance BusinessWeek copies so they could look up the names of stocks.

A number of the improper trades were made on behalf of Pajkin’s aunt, a retired Croatian seamstress.

Pajcin, Shpigelman, and the two ex-printing plant workers have also pleaded to criminal charges in this case.

If you are an investor who has lost money at the hands of analysts who engaged in insider trading, or anyone else who engaged in any other type of investment-related misconduct, please contact Shepherd Smith and Edwards today and ask for your free consultation. Our law firm is dedicated to helping people like you recover your losses.

Related Web Resources:

Ex-Goldman Analyst Gets Prison in Insider Trading Case, Reuters, January 4, 2008

Goldman Ex-Analyst Gets 4 Years in Insider Schemes, Wall Street Journal, January 4, 2008

Ex-Goldman associate sentenced to 57 months in insider case, Marketwatch.com, January 3, 2008

Insider Trading, SEC.gov

A class securities fraud lawsuit against Goldman Sachs & Co. was dismissed by the U.S. District Court for the Southern District of New York. The lawsuit had charged that a Goldman Sachs & Co. senior analyst issued false research reports with inflated projections of Exodus Communications Inc.'s financial growth on more than one occasion.

Judge Thomas Griesa granted the motion to dismiss after deciding that the second amendment complaint "fails to adequately plead loss causation." The court dismissed the original lawsuit filed by Exodus investors based on the same grounds.

The Allegations:

Goldman Vice President of Investment Research and Senior Technology Analyst Matthew Janiga was the analyst appointed by Goldman Sachs to cover Exodus because he was known for letting investment bankers influence his published opinions. Janiga put Exodus on the “recommended list” in January 11, 2001. Just one day prior, Exodus closed a $1.9 billion acquisition. Goldman Sachs served as the strategic adviser on the deal.

On January 24, Exodus’s stock dropped dramatically during after-hours trading. Investment bankers from Goldman Sachs allegedly were working on Exodus’s debt and equity offerings scheduled to launch in February. On the first day of the class period, and to avoid any adverse effects, Janiga allegedly published a note that reemphasized and defended his recommended list rating.

According to the plaintiffs, Janiga repeated this alleged ‘cycle of deception’ for the entire class period—predicting in its reports that Exodus would rebound from its weak beginning in 2001 during the second quarter. Janiga reportedly made specific numerical projections indicating this recovery.

Janiga finally began to publish reports about its doubts regarding Exodus’s performance between June 14- 21. Exodus filed for bankruptcy in September.

The court granted the defendant’s motion to dismiss. It said that although the fraud on the market theory is applicable to cases involving analyst reports, the plaintiffs failed to properly allege lost causation and the complaint must therefore be dismissed.

As a victim of securities fraud, you must speak with an experience securities fraud attorney who can help you. Shepherd Smith and Edwards has successfully represented clients throughout the U.S. Contact Shepherd Smith and Edwards today.

Related Web Resources:

Goldman Sachs & Co. : Exodus Communications, Inc., Stanford Law School

Goldman Sachs

New York Stock Regulation Inc. announced its enforcement actions against four trading companies. The regulator says that Ronin Capital, LLC mismarked over 8,300 short orders because of inadequate supervisory procedures and supervision. The company continued to mismark short orders even after the SEC brought the violation to its attention. Ronin Capital was censured by NYSE Arca and ordered to pay $200,000.

NYSE Arca fined Goldman Sachs Execution & Clearing LP (GSEC) $105,000 for failing to adequately supervise business operators and associated persons in a way that guaranteed compliance with odd lot trading order rules.

Pearson Capital Management LLC was censured and fined $5,000 because it failed to meet market maker requirements. Penn Mott Securities was fined $3,200 for similar violations.

NYSE Regulation also announced enforcement action against three people:

*Former UBS Financial Services Inc. Vice President Montague Hasie is permanently barred from the exchange because he refused to testify about events that took place while he was at UBS. Hasie and some of his clients were indicted in a U.S. district court for allegedly misusing shares.

*Former Wedbush Morgan Securities registered representative Matthew Pavich was temporarily barred because of books and records violations.

*Former UBS Financial Services Inc. employee Richard Wendell Babichy is barred for 12 months for failing to report a customer complaint, failing to follow a customer’s instructions, and making or causing to make false entries in his employer’s records and books.

If you have lost money because of the reckless or negligent actions of a stockbroker or anyone else in the securities industry, you have the right to get your investment back. The stockbroker fraud law firm of Shepherd Smith and Edwards can help you. Contact us today for your free consultation.

Related Web Resources:

NYSE Regulation

Ronin Capital LLC

Goldman Sachs Execution & Clearing LP

NYSE Regulation fined 14 of its member firms a total of $10.4 million in fines for failing to deliver trade confirmations to their clients and other violations.

Citigroup Global Markets received the heaviest fine of $2.25 million for failing to deliver trade confirmation documents in more than a million consumer transactions. Lehman Brothers and DeutscheBank were each fined $1.25 million.

Other firms sanctioned included UBS Securities; Bear Stearns & Co.; Credit Suisse Securities (USA) LLC ; Banc of America Securities LLC; Goldman Sachs & Co.; JP Morgan Securities; Wachovia Capital Markets LLC; and Keefe, Bruyette & Woods Inc. Fines levied against these firms ranged from $375,000 to $800,000.

According to the New York Stock Exchange (NYSE) enforcement wing, the violations occurred between July 1, 2003 and Oct 31, 2004. These include failures to ensure delivery of prospectuses to customers who purchased securities and mutual funds, failure to deliver product descriptions to customers purchasing exchange traded funds and failure to establish and maintain appropriate supervisory procedures regarding such activities.

Each of the member firms also agreed to certify that its current policies and procedures are reasonably designed to ensure compliance with current federal securities laws and regulations regarding such requirements. This action was one of the final acts by the regulatory staff of the NYSE prior joining the Financial Industry Regulatory Authority (FINRA) which has taken over all former NASD and NYSE regulatory responsibilities.

Shepherd Smith and Edwards represents investors nationwide in claims against securities firms. We have represented investors in more than 1,000 securities cases. To learn whether we may be able to assist you with a claim contact us to arrange a free consultation with one of our attorneys.

Former Goldman Sachs & Co. Associate Eugene Plotnik has pled guilty to conspiracy to commit securities fraud, in addition to eight counts of insider trading. The charges carry a maximum of 165 years in prison.

Plotnik had been charged with running a “multi-faceted,” multi-million dollar scam that used inside information from at least three sources to conduct trading. The sources included a Merrill Lynch analyst, a federal grand juror, and two printing press employees that stole advance copies of a business publication with nonpublic information.

As part of his plea agreement, however, Plotnik promised that he would not appeal a lighter sentence ranging from 4 years and 9 months to 5 years and 11 months in prison. He also agreed to repay the money. More than $6.7 million acquired from the scheme is in illegal gains. Federal authorities have already frozen bank accounts to secure most of the funds.

According to prosecutors, the defendants in this operation at one point considered using strippers to persuade investment bankers that had insider information about upcoming acquisitions and murders to reveal stock tips. They also used the names of an exotic dancer and relatives to front accounts. The SEC has charged 13 people for their involvement in the scam.

Federal authorities began an investigation in 2005 when they noticed irregular trading activities right before Adidas bought Reebok. They became suspicious after a 63-year-old retired Croatian seamstress made several million dollars when she made call options before the deal. She turned out to be related to David Pajcin, the other Goldman Sachs employee accused of leading the scam. Pacjin and Plotnik traded in at least 25 stocks.

If you have lost money because members of the securities industry have chosen to commit securities fraud, you should contact Shepherd Smith and Edwards immediately. We help investors that are the victims of insider trading scams and other kinds of fraud schemes recoup their losses.

Contact Shepherd Smith and Edwards today.

Related Web Resources:

Ex-Goldman banker pleads guilty to insider trading, MarketWatch, August 28, 2007

Ex-Goldman Sachs Worker Pleads Guilty, ABC News, August 28, 2007

A hedge fund managed by Bear Stearns that takes both bullish and bearish positions in subprime loans has been hit heavily by conditions in that market. Some of the fund's assets were held at Merrill Lynch, on margin. When the equity in the fund dropped, Merrill issued margin calls.

The hedge fund reportedly began with about $600 million in investor capital, $40 million of that from Bear Stearns and its executives, then borrowed $6 billion from Wall Street lenders, including Merrill, Goldman Sachs, Bank of America and Deutsche Bank.

As the fund's assets lost market value, the Bear Stearns managers scrambled to sell hundreds of millions of dollars in assets to satisfy demands for cash and assets from creditors to stave off liquidation of the fund. The managers auctioned almost $4 billion in mortgage bonds, and attempted to present a 30-day plan to sell more assets, but was unable to persuade Merrill to refrain from seizing assets.

An auction was then held by Merrill to liquidate these assets and the fund's fate remains in peril. It the hedge fund is dissolved it would become the second blowup of hedge funds dealing in the high risk home loans, known as "subprime" mortgages. UBS AG shut down Dillon Read Capital Management after bad trades in subprime-mortgage loans led to a $124 million loss.

Wall Street is concerned that the asset liquidations could cause values on other subprime pools to spiral downward causing additional pressure to liquidate other simliar portfolios. Sub-prime mortgages react to market conditions different than high-quality and liquid mortgage-backed bonds, and are more akin to "junk" corporate bonds in fluctuation and liquidity.

Shepherd Smith and Edwards is a securities law firm which represents investors nationwide in claims against investment firms. To learn whether our firm can assist you or your firm, contact us to arrange a free confidential consultation with one of our attorneys.

The U.S. District Court for the District of Columbia dismissed class action claims against Goldman Sachs & Co. stemming from two Real Estate Mortgage Investment Conduit--or REMIC--deals with Fannie Mae.

Judge Richard Leon said that the plaintiffs--Fannie Mae investors–-failed plead a case which involved "direct acts" of securities fraud by Goldman. (In a court system friendly to those accused of securities fraud, claims are not allowed for aiding and abetting Federal Securities violations and class action claims involving securities fraud can no longer be filed under state laws.)

However, this court's decision does not prevent members of the former class action from now seeking their own claim against Goldman in court or arbitration. Clients of Goldman who purchased shares of Fannie Mae during this period would likely have the stronger claims. Such claims could include aiding and abetting, conspiracy and other claims under state laws which were not allowed in the class action. Fortunately, statutes of limitations on individual claims are usually preserved while a class action case is pending in court.

Federal National Mortgage Association (FNMA or "Fannie Mae") is a federally chartered government sponsored enterprise that provides funds for commercial and residential mortgages. Shares of FNMA trade on the stock exchange. The plaintiffs filed the class securities fraud suit on behalf of investors who purchased shares of Fannie Mae between April 17, 2001 and Sept. 27, 2005. In addition to Fannie Mae, the plaintiffs named three former senior executives; KPMG LLP, Fannie Mae's outside auditor during the class period; and Goldman, which designed and implemented two REMIC transactions in December 2001 and March 2002.

The plaintiffs asserted that Fannie Mae repeatedly violated generally accepted accounting principles, issued false financial statements, and made other actionable public disclosures, thereby " 'engag[ing] in one of the largest financial frauds in U.S. corporate history.'" The plaintiffs then contended that Goldman participated in a securities fraud because it proposed the two REMIC transactions; suggested that they could help Fannie Mae manage its income recognition for GAAP purposes, and performed unspecified functions as underwriter/dealer when the REMIC interests were offered to prospective purchasers of those interests.

The plaintiffs alleged that the two "unorthodox" REMIC transactions shifted $107 million of Fannie Mae's earnings into future years. The allegations stated that Goldman was willing to engage in these transactions because Fannie Mae was one of its largest trading clients, from which Goldman received millions of dollars in fees.

Shepherd Smith and Edwards represents investors nationwide who have been victims of investment fraud. If you have questions concerning claims, including those alleged in the above-described matter against Goldman Sachs, call for a free consultation at 1-800-259-9010 or contact Shepherd Smith and Edwards online.

NYSE Regulation Inc. and the Securities and Exchange Commission say that a clearing affiliate and prime broker of Goldman Sachs Group will pay $2 million in fines and penalties over its alleged role in an illegal short-sale trading scheme that was executed by Goldman Sachs customers through their accounts with the brokerage. Goldman Sachs Execution and Clearing, LP has not admitted to or denied any wrongdoing by agreeing to the censure. They are, however, agreeing to cease and desist from future violations.

The SEC charges that firm customers unlawfully sold securities short right before public offerings of the companies’ securities. It is accusing Goldman of violating the rules that mandate that brokers must mark sales short or long, while restricting stock loans on long sales. Both NYSER and SEC say that if Goldman had proper procedures in place, it would have discovered via its own records this illegal activity by its customers. Two Goldman customers have already settled SEC charges connected to their alleged participation in these activities.

SEC Chairman Christopher Cox told the U.S. Chamber of Commerce on the day of this announcement that the commission and its senior staff members are very concerned about abusive naked short-selling. He admitted that Regulation SHO had not properly addressed these issues and that the commission will now eliminate the regulation’s grandfather provision. Cox said that naked short-selling was connected to settlement and clearance systems and that the SEC would use technology to further deal with this issue. He said the action against Goldman was important.

The SEC says that customers used the firm’s REDI System (the automated trading system for broker dealers and their direct market-access) to make sell orders, which Goldman then executed as long sales. Customers, however, had sold the securities short and did not have the securities upon the settlement date. Goldman then delivered borrowed and proprietary securities to brokers so that the buyers could settle the customers “long sales.” Both NYSER and the SEC are in agreement that Goldman was unreasonable to rely on the customers’ representations that the offered securities belonged to them.

SEC Enforcement Director Linda Chatman Thomsen says that brokers are not allowed to ignore obvious discrepancies of illegal trading by its customers even though the latter now has direct market access platforms that let brokers execute bigger volumes of trade more efficiently and rapidly for customers. The SEC says that brokers are mandated to investigate a customer’s trading activities if significant disparities indicate that a customer may be lying to a broker about its representations.

NYSER Executive Vice President of Enforcement Susan Merrill says that blind reliance on customer representations that a sale is long when securities are being sold is not appropriate if a firm sees evidence of short selling.

The SEC says that since March 2000, patterns of trading by the customers and Goldman’s own records indicated that the customers were selling securities short and violating the 1934 Securities Exchange Act Rule 105 and Rule 10a-1(a). Goldman’s records, according to the SEC, also indicate that customers covered their short positions with securities they bought in follow-on and secondary offerings after the sales. The SEC says that Goldman could have noticed these trading disparities if they had the proper procedures in place to do so. NYSER says Goldman neglected to reasonably supervise its business activities.

Over the years, Shepherd Smith and Edwards has represented thousands of investors who have lost investments because of the inappropriate actions of stockbrokers and their firms. Contact Shepherd, Smith, and Edwards for your free consultation.

Related Web Resources:
SEC Administrative Order (PDF)

Goldman Sachs Execution and Clearing

Securities Exchange Act of 1934